Econometric Assessment of the Effect of Small and Medium Enterprises on Economic Development (The ASE of Azerbaijan)

Abstract

. It is important to understand the effect of Small and medium enterprises (hereinafter-called SME) on economic development the dependent variable cannot have a causal impact on the past values of the endogenous regressors (Arellano and Bond, 1991). Relying on this fact, we construct instruments for possible endogenous SME growth variable using its own past values. After filtering out the variation (noise) in SME growth variable in current period which is not associated with its own lagged values we hope that there will not be any signal left in the predicted values of SME growth variable which can be affected by current period GDP contemporaneously. After doing so, we believe that any positive regression coefficient obtained is purely due to causality flowing from SME growth to GDP and not vice versa. Moreover, we use three different fixed effects model for robustness check purposes and find that the relationship between SME growth variable and GDP in each sector stays positive and statistically significant which makes our results more convincing.